Shane is here to help you with your property taxes. Now more than ever, deals are falling through because of property taxes. Learn why that is, and why you SHOULD underwrite taxes before taking ownership of an asset. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

With us today, Shane Moncrief. How are you doing, my friend?

Shane Moncrief: I’m good, Joe.

Joe Fairless: Nice to have you on the show. Shane is gonna take a different approach from a guest that we usually have. He specializes in commercial property tax and currently leads the Commercial Property Tax consulting practice. He’s a Principal and he is a Practice Leader at Property Tax Commercial at Ryan LLC. He’s formerly a senior consultant for a commercial real estate company and he is based in Atlanta, Georgia. He’s given tons of presentations to professionals on real estate and the property tax industry. With that being said, Shane, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Shane Moncrief: Yeah, I’d be happy to do that, Joe. My current focus is I lead our national practice, which is about 370 people operating across the country at 29 different markets; we cover property taxes from start to finish in terms of an asset’s lifecycle. Our clients are owners and users of real estate. [unintelligible [00:03:35].19] most of our clients are owners of real estate, from developers to real estate investment trusts, pension funds, and they include clients that have 2-3 assets and those that have hundreds.

On the user side, we also supply services to tenants who are typically triple-net tenants, where they really control the property tax decision and they’re ultimately on the hook for the tax bill itself. That’s what we do, so my focus is just leading and growing our practice, making sure we deliver quality service and low taxes.

I tell people all the time, Joe, what we do every day is to fight for truth, justice, and lower property tax.

Joe Fairless: [laughs] Well, how do you do that? Explain the process, will you? And you might have to use a specific example, because that might be too broad of a question.

Shane Moncrief: I’ll take you through sort of a typical tax appeal… And I would say for property taxes for most owners really even should start – and this is maybe a piece of advice – before you even buy the asset. I have practices about 28 years in property tax and [unintelligible [00:04:47].29] tax appeals in a lot of different states, but for the first 10 years of my career, we very rarely had purchasers call us to help underwrite taxes on the very front end of a deal. And then call it 15-16 years ago property tax took on a much more important role in underwriting, and I’ll tell you, I’ve seen it more in the last 3-4 years where property taxes actually are killing deals on both development and acquisition. Assessors are more aggressive and property taxes are an ever bigger piece of the operating expense line. It winds up really being important for owners to underwrite those taxes appropriately.

I tell people – that process of property tax begins before you own it. Once you own it, that cycle is generally the same across the country. Some people will use different names and processes, deadlines vary greatly, but it all begins with an assessment notice. The local assessor sends you a notice of value, and it’s at that point an owner has to decide whether that value seems fair to them on sometimes two fronts. One is “Does that assessment notice represent market value of the property or less?” because typically in the property tax world your assessment should be equal to or less than its real market value.

Then in some states it’s important to actually not understand just what the value of your property is, but also to understand the value of your property in the context of its competitive set. Frequently you see this in Texas, in Georgia and in some other states, where the uniformity of the assessment is actually a big piece of the equation. You might have a property that’s worth ten million, and you get an assessment for eight million, and your initial reaction is “Oh, this looks fine. I don’t need to file a tax appeal”, but in fact if the competitive set – your direct competitors, properties that are similar to yours – is assessed at six million, well then you’ve got a basis for tax appeal in some states.

Once you get the assessment notice, you have to make a decision as to whether that value seems fair and equitable to you based on market and based on comparables. If it doesn’t, then that’s when the appeal process starts, and it varies widely across the country. Most states start with an administrative appeal, and often times even a bit of a negotiation in advance of the formal administrative process.

So it’s a function of meeting with the local tax assessor, discussing your property, its uniqueness, its rent roll, its financial statements, its value vis-a-vis your competitive set, and then convincing him that a change needs to be made, the assessment needs to be lowered, which then in turn saves you money on your tax bill. If you can’t come to an agreement through that informal process with the appraiser or the assessor, then it moves on to a more formal process where you make that presentation of your case to an administrative panel, in most places. It varies widely, and that’s one of the most difficult things about property tax – it’s different in all 50 states: different terminology, different process… But then even within the states, because property tax is a local business, it varies a fair amount, even from one county or assessor to another.

Joe Fairless: What state or county is most like the Wild, Wild West?

Shane Moncrief: Wow… There’s probably a couple of ways to do that. Certainly, in Texas the process moves along very quickly. I hate to call it the Wild West, but it moves along quickly and there’s a lot of negotiations that occur; the process is over from start to finish most of the time inside of about 90 days. But you see, a lot of other places – and I’ll tell you, there are states that your listeners ought to be very wary of, and those are states where you have to use…

Joe Fairless: California. New York.

Shane Moncrief: Well, California and New York, but I’ll tell you, it’s Ohio, Pennsylvania… It’s places that seem a little more subtle than those… And because your battle may not be with the local tax assessor, it may actually be with the school board. This has been pretty common practice in Ohio for a while. Recently, we’re seeing it Pennsylvania, some even in New Jersey, where the local school boards have been given what sort of legally is called “standing”, they’ve been given the right to file tax appeals directly against the taxpayer. So your enemy in that battle, so to speak, is not the local tax assessor, it’s actually the school board. We’re seeing more and more of this, particularly after an acquisition.

Picture this – you bought a property, it’s in Ohio, they’re on a three-year reevaluation cycle; you think you’re good for another two or three years and you underwrite your taxes flat, or maybe growing a couple percentage points to deal with the [unintelligible [00:10:26].08] You buy that property for 15 million dollars and the current assessment is ten. You think everything’s fine for a couple years, and then you get this little nasty notice in the mail that the school board has filed an appeal against you to have your property’s value raised up to its fair market value of 15 million.

You can imagine the local tax assessor simply throws up his hands; he’s got no interest in fighting against the school board… What’s the tax assessor gonna say, “No, no, no, don’t raise the value!”? That’s not gonna happen. So the school boards frequently win those cases, and that turns out to be a nasty little surprise for taxpayers. It’s the reason I say, Joe, that property tax considerations for a property start before you even buy it… Because if you don’t underwrite it appropriately on the entry, you can get some ugly surprises with reassessments in even your first year or within the early, early years of your ownership of that asset.

Joe Fairless: Yeah, I know that in Cincinnati the school system has people who are full-time employees and their primary responsibility is to do what you’ve just described. And clearly, their salaries are being paid in some form or fashion from somewhere, and that is actually from the work that they’re doing… And they have full-time employees who are focused on getting the taxes increased on properties.

Shane Moncrief: That’s exactly right.

Joe Fairless: I interrupted you from what you were talking about from the process, and I was just curious, but I do wanna talk about the process. So if no agreement, then you go through a formal process, and usually it’s to an admin panel, and then what happens?

Shane Moncrief: From that point, you and the assessor are each presenting cases in front of that administrative panel, and they’ll make a decision. I’ll tell you, across the country, the sophistication of that panel, as well-meaning as its members might be, the sophistication of that panel varies greatly from one state to another, from one country or township to another… And not all of them – very few of them, in fact – are commercial real estate people. Occasionally, you’ll get lucky enough to have a residential person participate as part of the panel. But you’ve made your presentation, and then you wait on their decision. Then every state has a judicial forum in which to contest if you’re not happy with the administrative panel’s decision. And again, that varies greatly in terms of that process.

For instance, in New Jersey there is no administrative process. The very first step in your tax appeal is into New Jersey’s tax court. You take sort of the opposite end of the spectrum in California, where you have an administrative level, but by and large you don’t see a lot of valuation issues go beyond that because their court level appeal is only dealing with matters of law, not matters of value.

Again, every state is different. It ends up being one of the things that you really have to watch all the pitfalls from one state to the next.

Joe Fairless: The admin panel – you’ve given that disclaimer very well… So it depends on the county, the area of who that comprises of, but just generally, what incentive do they have to rule in the owner’s favor? Because I would think they’d have all the incentive in the world to say “Nope, sorry. We wanna hike up the property tax [unintelligible [00:14:09].09]”

Shane Moncrief: That’s a good question, but it’s probably not necessary to be quite so cynical, although I can see it, it’s easy to head in that direction. These panels are in general supposed to be independent, appointed by generally the local county or the local town, and their job is to be somewhat independent. I would tell you, Joe, just like you said, most of them are assessor-leaning, but they take their job pretty seriously most of the time. They’re trying to get the right thing for the taxpayer and for the town.

By the way, not every administrative panel you’ll be in front of is actually independent. There are a few states – Mississippi for me comes to mind – where your presentation is actually to what in Mississippi they call the Board of Supervisors, which is a county commission. So they absolutely are looking at this from a tax and revenue position, not a valuation position. Most of them are trying to do a pretty good job.

We’re actually very successful when properties are overvalued, either in terms of just pure market, or in terms of uniformity. We’re really pretty successful when those situations arise. The boards are generally trying to do the right thing. They hear our evidence, they hear the evidence of the assessor and then they’re making a decision. Like you would expect, you see a lot of “split the difference; meet you somewhere in the middle”, those sort of things, but I will tell you, we are successful many more times than not when there is a real issue that has to be addressed by the local board.

Joe Fairless: Is the local board compensated?

Shane Moncrief: They are. In some states they’re paid like a jury member, so a fairly nominal amount, like a juror would be paid for jury duty service.

Joe Fairless: When you do that appeal in front of the local board, how much of it is the numbers and how much of it is the owner can’t afford to pay this amount, and you’d be hurting him or her, they might go into bankruptcy, that would hurt the area…? How much of the story is that angle, if at all?

Shane Moncrief: Well, that’s a really good question. I will tell you, Joe, I describe it to my clients like this – it’s just like a baseball game. In a baseball game you’ve got two people that are calling the game, right? You’ve got the play-by-play, and he’s telling you balls and strikes, and he’s giving you that view of the game, what the batting averages are. That’s the numbers, in this case – it’s the rent roll, it’s what my rents are, my expenses, what’s an appropriate cap rate to apply to get a value? That’s the play-by-play.

But in every case, you get the other side of the broadcast – that’s the color commentary. What you describe then is the color commentary. “This is going to [unintelligible [00:17:09].24] This is going to be bad for a neighborhood. This is gonna force the property into bankruptcy…” That color commentary looks like any number of things, but I would tell you it varies property to property… But it’s 85% numbers, 15%-20% color commentary.

Joe Fairless: You already answered the question that I was about to ask… I was about to ask you the percent of which to which. Okay, cool. So once the judicial forum to contest if you’re not happy with the admin panel decision – is there anything else after that judicial forum, or is that pretty much the end of the line?

Shane Moncrief: That’s the end of the road, Joe. You see, very few property taxes – and frankly, I’m not aware of any real commercial property tax appeals that wind up going beyond the judicial level. Now, you will find — maybe I should correct myself… Even within the judicial framework, just like a normal court case, you have the local court – call it a circuit court, a superior court (those titles vary quite a bit) and then you have an appellate court. Very few commercial cases make it to the appellate court, a state Supreme Court, and then you rarely see a federal case, particularly on the commercial real estate side.

Most of the federal cases as it relates to property tax have been sort of interstate commerce type of claims, railroad… Those sort of cases.

Joe Fairless: What stage in the process do you see the most success in with your clients?

Shane Moncrief: Well, it varies again – I hate to keep saying it again, Joe, but it varies a lot by state.

Joe Fairless: No, I get it.

Shane Moncrief: But I would say a fair amount of success in some states at the administrative level. We find that our work Texas you see a lot of that that’s done on the informal basis, because the local assessor – the Appraisal District is what they call them – really need to make their way through the tax appeals pretty expeditiously. I would say it’s 20%-30% resolution there, and then the bulk of it is done at the administrative level. Then a percentage that goes on to court, and very few – this is worth saying… Even if you file an appeal to the judicial level, very few of those cases actually go to a trial. Most of them are settled outside of the court room.

Joe Fairless: If it goes all the way to the end with your team, how are you charging? Because I’m wondering if they’re gonna make money at the end of it?

Shane Moncrief: At every step in the process it really is a cost/benefit analysis. Most of our property tax appeal work is done on a percentage of savings, it’s a performance fee. That process has got obviously an automatic payback through the administrative level, because you don’t pay a fee unless there’s tax savings to go along with it.

When you get to the judicial level you have to be smart, because at that point you’re gonna need an attorney, you need to select the right attorney, and you need to have that attorney being very accountable – accountable to ownership – and we work with our owners in that process to make sure that the attorneys are actually focused in the right direction, to help control the cost of the attorney as well.

So you’ve got an attorney, you may or may not have an appraiser, but at every point in the process you’re evaluating cost/benefit. Even from the initial filing of the case, there are benchmarks through that process where in conjunction with the owner we’re giving advice to the owner, “Okay, we think this is worth taking two more steps in the process. Let’s go to mediation, let’s do an arbitration. Let’s have a sit-down right before we go through the interrogatory, the discovery process.” Again, trying to make sure that our clients wind up with a return on their cost, a return on their investment in this process.

Joe Fairless: Based on your area of expertise, what is your best advice ever for real estate investors?

Shane Moncrief: The best advice ever… I would tell you, Joe, it’s “Run your property tax like a program.” Take a programmatic approach, from investment underwriting (which is so important) to that annual cycle. Because what I described for you earlier, that’s an annual cycle in most states. Now, there are different cycles – two-year, five-year cycles – every state being a little different, but my best advice is don’t treat this like a piece of machinery is broken and then you need to go fix it; think about this as an annual maintenance sort of contract.

My experience is that the owners who take a very programmatic approach every year – it starts with the analysis on the front; once it’s owned, every year they’re going through this process to make sure it’s fair… You will consistently see those properties are the ones that pay the lowest tax.

The worst year that an owner can do is every year get that assessment notice and then make a decision one year at a time on whether they wanna file a tax [unintelligible [00:22:48].01] test.

Joe Fairless: And last question and then we’ll go into the lightning round… Do investors work with you who only have, say, one single-family house as an investment property?

Shane Moncrief: We don’t do any of the single-family residentials for direct owners. We do have a number of clients… The private equity, as you guys I’m sure have covered in previous podcasts – the private equity firms got big in the single-family homes, and we have several of the largest consolidators of those single-family home portfolios as our clients, but we’re not doing tax appeals on individual homes for homeowners.

Shane Moncrief: I don’t read a lot of books… Tough one. I don’t have an answer.

Joe Fairless: Best ever movie you’ve watched?

Shane Moncrief: Oh, wow… The Quiet Man, John Wayne… Anything John Wayne is on my list.

Joe Fairless: Best ever way you like to give back?

Shane Moncrief: I give back financially a lot, it’s just sort of part of who I am. A lot of mission trips that I’ve been a part of, and for the different foreign countries; I enjoy doing it that way. But we do a lot of stuff in our local office as well – food bank, that sort of thing… I really enjoy that.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Shane Moncrief: It’s easy to find me – Shane.Moncrief@ryan.com is my e-mail address. Ryan.com is our website; you can find my e-mail address and my bio on that site. It’s the perfect way to get a hold of me.

Joe Fairless: Outstanding… Well, Shane, you made taxes fun, and that is usually an oxymoron, but you really did, you made taxes fun… Talking about how we can lower our taxes in a way that is legal, and plays within the rules.

You said it first starts before we buy the property, and then once we buy the property it’s an annual thing that we wanna take a look at – does the value seem fair to use based on the market value and also the context of the competitive set? Looking at the comps and what the comps are being assessed at. If not, then we try and do an informal negotiation with the local assessor. If that doesn’t work – in Texas, it probably will… But if that doesn’t work and you’re in Ohio and the school board’s coming after you, then you’re gonna have to probably go a little bit more and do the more formal process with the admin panel. If that doesn’t work, do the judicial panel. Again, it varies state by state, municipality to municipality, but that’s the high level of review.

I loved this conversation, so thanks so much for being on the show. I hope you have a best ever day, Shane, and we’ll talk to you soon.